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Economy hits political faults

by Kevin Rafferty

Special To The Japan Times

Naoto Kan’s departure as Japan’s prime minister looks to be as messy and wretched as his uncomfortable time in the job.

Don’t weep for him and his querulous colleagues who are too self-centered and incompetent to understand the damage they are doing, but instead for the people of Japan who have stoically watched as the politicians have brought the country to a dangerous precipice.

The economy is plowing new depths because of the continuing fallout from the triple disasters of March plus nervousness about the global recovery, all added to the political shenanigans. Japan is already sitting on some deep economic and social structural fault lines because it is maturing and aging too quickly for its resources and finances. It would be a fascinating case study of the way that politics interacts with society and the economy either to boost development or to hold the economy to ransom. Normally third world dictatorships and banana republics are the most fruitful places to study these linkages, not developed democracies.

The economic damage from Japan’s March 11 disasters has been longer and deeper than economists and politicians predicted. A week after the disasters, Kaoru Yosano, the hawkish economics minister previous drafted into the coalition Cabinet to suggest ways of paying for Japan’s already spendthrift government ways, tried to shrug off the damage as little more than a hiccup that would not have a negative economic impact.

Already Japan has gone into recession, in the technical sense of two successive quarters of negative growth. Gross domestic product in the January to March quarter fell by a higher than predicted 0.9 percent, meaning an annualized fall of 3.5 percent. Revised figures for the final quarter of last year also showed that the economy had shrunk by 0.8 percent.

The current quarter to June will also show negative growth as the immediate damage of the disasters hurt the economy, including infrastructure devastation in the affected area, power shortages extending to Tokyo and beyond and the ripple effects of disruptions to global supply chains spreading far beyond Japan, especially in the automobile and electronics industries.

Economists are now divided about how rapidly growth will resume in the second half of the year. Yosano puts on an optimistic front, predicting positive growth of 1 percent in the fiscal year to March 2010. His confidence is based on the argument that the slump has been caused by supply disruptions and demand for Japanese goods is still high.

Other economists agree, forecasting a sharp V-shaped recovery as life quickly gets back to normal and spending on reconstruction kicks in. But others are more cautious and warn that political games are exacerbating the problems. In the immediately affected area there are continuing grumbles about bureaucratic rules and regulations. One convenience story chain prepared to dispatch a mobile store complete with a refrigerator for cold dishes and cooking facilities for hot meals. But the health department of Iwate Prefecture banned the vehicle because its 160-liter water tank did not meet local government 200-liter tank requirements to ensure that there is enough water for washing and cleaning. Other prefectures demand more modest tanks, for example, only 18 liters in Osaka and 80 in Tokyo.

Almost 100,000 people are still living in evacuation centers and it seems unlikely that hopes of getting everyone into temporary housing by August will be met, partly because of a shortage of technicians qualified under the construction laws.

Big manufacturers were harder hit than originally expected. Although the area hit by the earthquake and tsunami was mostly agricultural rather than industrial, it had enough industrial suppliers to produce damaging cascading effects on the supply chain. Industrial Japan has stepped up its efforts and hopes to be in full production by the fourth quarter.

Morgan Stanley MUFG sponsored a conference in May including politicians, bureaucrats, academics and businessmen, and concluded that: “The deflationary impact of the earthquake in Japan will be deeper and longer than we had expected in our initial assessment. Supply has responded more quickly and positively than we had thought. (Worry: power shortages may spread if local communities prevent re-start of nuclear facilities that are under inspection.) Demand has responded more slowly. Consumer confidence remains weak and spotty.”

In these circumstances, the political circus becomes crucial in a number of ways. Morgan Stanley added an analysis of the dangers, which may prove rather static: “The government’s revival spending package for the autumn is likely to be delayed by political factors. Thus, with higher supply and lower demand, deflationary pressures should worsen. In turn such a worsening will likely trigger further downgrades of official GDP forecasts and trigger new policy action, in both monetary and fiscal areas.”

It is not clear when the politicians will stop playing their games and try to tackle the very real economic problems, let alone how to pay for new spending to boost the economy. Kan avoided defeat in a no-confidence motion by promising that he would step down once the government had brought the troubled reactors at the crippled Fukushima nuclear plant to “cold shutdown” status. That could take until January, or later if new problems arise.

It quickly became clear that Kan’s timetable is too slow for his critics. Suggestions from aides that he would resign by August, giving him time to push through a fresh budget to aid recovery from the earthquake and set the economy on a smoother track, were brushed aside by opposition parties and by key opponents inside his own party. Kan’s ruling Democratic Party of Japan is preparing to elect a successor next month, but with the party split along the gigantic Ichiro Ozawa fault it is hard to see who can be a positive leader. Leaders of the opposition Liberal Democratic Party and Komeito want Kan out this month and are prepared to hold up the reconstruction budget as part of their hard-line game — so much for the politicians’ concern for the plight of the country.

Japan’s tragedy is that there is no one with a plan waiting in the wings ready to spring into action to restore the ravages of the devastated area and to put the economy on track. Indeed, none of the prominent leaders involved in the in-fighting has offered any economic suggestions, let alone remedy. There is no consensus, nor even a name, of who may take over. Kan’s Democratic Party of Japan controls the Lower House, while the opposition controls the Upper House, so there is plenty of room for further fighting.

Leaders of Keidanren and other business organizations have suggested that Japan is in such a mess that the best solution would be a grand coalition, which might appear sensible advice. But suggestions of a grand coalition previously failed because everyone wanted to pull the strings. Indeed, Japanese politicians are so alike and quarrelsome that they remind one of Tweedledum and Tweedledee, the identical twins in Lewis Carroll’s Alice Through the Looking Glass, who were fighting and bawling for a child’s rattle.

Kevin Rafferty is author of “Inside Japan’s Power Houses,” a study of Japan Inc and Internationalization.”